Capital gains tax

January 2024

Property income found to be investment not trading

The First-tier Tribunal (FTT) found that although a taxpayer had renovated and sold three properties, the requirements for this to be classed as a trade were not met. The gains were taxable as capital rather than income.

The taxpayer appealed four discovery assessments, three closure notices and associated penalties. The amount at stake was almost £1m.

The discovery assessments were for rental income from letting a flat, where the taxpayer argued that expenses exceeded rent. The FTT found that this was a careless mistake rather than deliberate behaviour, so allowed the appeal on that point as that meant that the years were out of time to be assessed.

The closure notices related to capital gains on the sale of three properties that the taxpayer had renovated. HMRC argued that the renovation and sale of these three amounted to a trade, so profits should be taxed as income. The taxpayer was a builder, so HMRC considered it linked to his job.

The taxpayer argued that he had occupied each property as a family home, albeit for short periods. The moves were due to family reasons and the renovations to make the properties suitable for his family to occupy them. The FTT considered the background to the transactions, ran through the badges of trade, then considered the question in the round. Although some badges were met, such as financing and renovation, it found that it was more likely than not that the purchases were to acquire a family home and the sales were due to changes in circumstances. There was no trade, any gains were taxable as capital. It also found that private residence relief was available on this basis.

Ives v HMRC [2023] UKFTT 968 (TC)

From Tax Update December 2023, published by Evelyn Partners LLP

Income tax

January 2024

Appeals on seed enterprise investment scheme refused

The First-tier Tribunal (FTT) found that companies did not meet the conditions for investment to qualify under the seed enterprise investment scheme (SEIS). The companies were not trading and there was not enough risk to capital.

Ten companies, all of which had the same sole director, appealed against HMRC’s decision not to grant them the right to issue SEIS certificates to their investors.

The director planned to produce audio-visual content to sell at religious sites in India and Nepal. He set up one company for each of the intended sites, ready to develop the material, the nature of which changed during planning. He made advance assurance applications for each, and HMRC confirmed that based on the information he provided on financial and business plans, investments could be made under SEIS, subject to final authorisation. HMRC refused the final applications.

The FTT carefully considered the details of the initial investments and what activities were conducted. It agreed with HMRC that the conditions to issue SEIS certificates were not met. The companies did not meet the risk to capital condition, as there was no intention to take on staff, nor increase turnover, and the primary reason for having separate companies was to allow more SEIS relief to be claimed. The trading condition was also not met, as the companies were not trading on a commercial basis. Some work for the companies was done by another group out of goodwill, not commercially, and there was not enough evidence that the companies were creating unique intellectual property.

This case highlights that meeting these conditions can be complex, particularly as here getting advance assurance was not enough to ensure the claims were successful.

Legend of Golden Temple Ltd & Ors v HMRC [2023] UKFTT 988 (TC)

From Tax Update December 2023, published by Evelyn Partners LLP

Goodwill belonged to the individuals not the company

A firm of financial advisers transferred its business from a company to an LLP. The taxpayers contended that their accounts, which HMRC had not challenged as being GAAP compliant, showed that the goodwill had never belonged to the company. Each adviser had a client bank that was personal to them and held that goodwill personally. When it was transferred into the LLP, the payments made for it were made directly to the taxpayers. HMRC argued that the goodwill belonged to the company, so the money reached the taxpayers as a distribution from the company as the LLP owed it to the company.

The First-tier Tribunal (FTT) agreed with the taxpayers that the Supreme Court NCL case set a clear precedent that accounts prepared in accordance with currently accepted accounting principles “are the best guide as to the true and fair view of the profit or loss of the company in the relevant accounting period” and that there was no basis to conclude that the accounts were anything other than GAAP compliant.

On this basis the company did not own the goodwill, but just fixed assets. Stating as HMRC did that the company owned the goodwill would mean that more than £2m was missing from the balance sheet for several years, a material inaccuracy, which was not a conclusion that could be drawn from the evidence.

The FTT distinguished classic goodwill, where the asset is a client base providing ongoing income, from a personal relationship that might be leveraged to bring new business. It found that the relationships themselves represent a valuable asset which vested with each of the individuals, and which could, subject to the decision of a client to transfer that relationship to another adviser within the company, be taken from the company without restriction.

In conclusion, it was found that the goodwill belonged to the individuals and so there could be no distribution from the company.

Smith & Anor v HMRC [2023] UKFTT 912 (TC)

HMRC v NCL Investments Ltd & Anor [2022] UKSC 9

From Tax Update December 2023, published by Evelyn Partners LLP

Residence and domicile 

January 2024

Receiving tax repayments after leaving the UK

HMRC has updated its guidance for individuals leaving the UK and using a P85 form to inform HMRC of this. The P85 can be submitted online (a government gateway login is required) or through a print and post form.

Individuals who are leaving the UK, or who have already left, are able to use form P85 to inform HMRC of their change in residence and claim back tax that has been deducted from their UK employment. A claim can be made if the individual has been resident in the UK and had a UK employment, and is leaving the UK to work abroad full time for at least one full tax year. Details from the taxpayer’s P45 are required to complete the form. 

If a repayment is due to the taxpayer, HMRC can make a transfer to the taxpayer or someone on their behalf, or post a cheque to the taxpayer or a nominee. However, HMRC will not pay any fees associated with converting the repayment to a foreign currency or transferring the repayment abroad. As such, HMRC has advised that taxpayers may want to keep their UK bank account open to receive the repayment without incurring such fees.

The P85 form is not suitable for everybody. Taxpayers who are within the self assessment system do not need to submit a P85 form to HMRC. A self assessment tax return should instead be filed in the normal way, with the SA109: Residence, remittance basis, etc pages completed as appropriate.

Contributed by Mei Lim Cooper